Insolvency appointments hit historic low due to COVID-19 support measures
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The latest statistics reveal the number of insolvency appointments has nosedived since the beginning of the COVID-19 pandemic in March 2020, with both corporate and personal insolvency registering the largest quarterly decline on record.
Personal insolvency
Statistics released by the Australian Financial Security Authority (AFSA) revealed an overall drop of 35% in new personal insolvencies in the June 2020 quarter compared to the same quarter last year. Victoria recorded a drop of 32.9% while varying degrees of decrease were witnessed across all states and territories, with Tasmania having the largest decrease of 57.8%.
The June 2020 quarter saw 2,205 new bankruptcies nationally, which represents a drastic decline of 42.4% over the same period last year and is the lowest quarterly number recorded since March 1989. This contributes to an overall decline of 18.8% in the 2019-20 financial year, as bankruptcies fell to 12,450 in total which is the lowest annual level since 1989-90.
Moreover, debt agreements declined by a significant 25%, reversing its recent growth trend. Personal insolvency agreements also recorded a decrease of 10%, however, its impact on the overall numbers is limited since it has significantly lower levels of appointments relative to bankruptcy and debt agreements.
Corporate insolvencies
The decline in personal insolvency is mirrored in the corporate sector. Statistics from the Australian Securities and Investments Commission (ASIC) indicate a record decline of 42% in corporate insolvency appointments in the June 2020 quarter. As a result, the number of corporate insolvencies hit the lowest level since September 2001.
Except for receiverships which rose by 61%, a decline is observed in all other forms of corporate insolvencies. Most significantly decline in the most common appointment types, including voluntary administration (32%), creditors’ voluntary liquidations (40%), and court liquidations (61%).
Reasons for the decrease
The main driver behind the decline in personal and corporate insolvencies is the government measures to support individuals and businesses during the COVID-19 pandemic. While initiatives such as JobKeeper Payments and moratorium on creditor actions successfully mitigated the economic impact of Covid-19, the government’s all-out approach also meant many unviable businesses have been kept afloat. Referred to as zombie companies, these companies would normally otherwise have become subject to the insolvency process but were able to survive purely on government handouts. This is why many insolvency practitioners expect a sharp increase in corporate insolvencies once the stimulus measures come to an end.
Looking forward
As many of the government support measures have been extended into 2021, most importantly the Jobkeeper payments, it is expected that the number of insolvencies will stay low over the remainder of 2020.
However, economic indicators suggest a significant increase in personal and corporate insolvencies Consumer and business confidence is expected to remain in negative territory for the foreseeable future. The effective unemployment rate has hit a historic high of above 10% and will take considerable time to go down. Moreover, government support and repayment holidays by lenders will eventually come to an end, and individuals and businesses will need to recover in a weak economy while facing significant deferred liabilities.,.
Businesses in financial distress should confront reality and seek professional advice early in order to optimise outcomes and maximise their chance of survival. The team at Collins Wentworth is experienced in business financial matters. If you have concerns about the financial position of your business and wish to know more about how we can assist you, contact us today.
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